India’s economic reform needs a little more authoritarianism

With the world’s largest General Election now fully underway, more and more people are expressing concern of a national impasse in India: a crossroads in terms of social, economic, and perhaps even constitutional identity.

Since Prime Minister Narendra Modi came to power in 2014, questions around India’s economic potential have become inextricably linked to issues around the pattern of its politics – in particular, debates centred on authoritarianism.

Autocracy tends to be associated with a deficient rule of law and socio-political abuse, often with militarian tendencies. It goes without saying that this should be vehemently opposed.

But could India’s economy do with a little more “authoritarian” direction? Or rather, is the Indian economy in need of a little more central planning?

Like China and the former Soviet Union, India used to have five-year plans, between 1951 and 1997. During this period, it sustained real growth rates of four per cent a year, thanks to a large demographic dividend and the process of bringing subsistence farmers into the industrial economy.

But central planning created a bureaucratic chimera, inhibiting innovation and efficiency. As the world became more integrated, India’s central planners forgot about the need to be competitive on the international stage. Between 1950 and the early 1990s, India’s share of world trade fell from 2.5 per cent to 0.5 per cent as it became increasingly protectionist.

For most of the western world, “central planning” remains a dirty term. Until the financial crisis, the Washington Consensus reigned supreme, with the dictum that the “freest” economies were the best economies. Even as capitalism has come under closer scrutiny in the past decade, statism remains treated with deep suspicion.

Yet the economic history books tell us that central direction was behind three of the greatest economic success stories of twentieth-century development: Japan in the first half of the century, and South Korea and Taiwan from the 1960s to the 1980s.

Korean and Taiwanese industrial policy extended well beyond the limits of genuinely pluralistic government. These were corporatist states, in which certain industrial giants were favoured over smaller interest groups.

By the 1980s, the 10 largest Korean conglomerates, or “chaebols”, accounted for two thirds of Korean GNP, up from a third in the 1970s. The economic mechanism at work was the authoritarian use of the state to raise the investable surplus, directing it to industries and firms that could sustain higher wages in the future.

The results were intense cycles of investment, sustained even as the global economy turned down, which led to a rapid rise in the demand for labour and a surprisingly wide distribution of the benefits of growth.

Of course, there are many more examples of central planning going horribly wrong. What separated Korea and Taiwan (and previously Japan) from the rest was not only an outward-looking, global focus and a coordinated attentiveness to the long-term economic issues, but also the particularly active involvement of the centralised state.

Today, India’s economic policy is the worst of both worlds. It is heavily protectionist, with politicised and poorly run state-owned banks, but it lacks visionary central planning, with the global, long-term focus of Korea or Taiwan. Ostensibly capitalist, it lacks the institutions necessary to support the efficient allocation of capital, such as functioning bankruptcy laws or a corruption-free judiciary.

Worst of all, it is mired in layer upon layer of municipal, state and federal bureaucracy – which Modi, despite his promises, has made disappointing progress in reducing.

One way or another, India needs serious economic reform if it is to attract investment and turn its economy around. And if that economic reform takes on a subtle authoritarian hue, that may be no bad thing – if (and it’s a big if) it’s done right.